Australian state governments are scaling back infrastructure spending in the face of mounting worries about debt levels. But the state of New South Wales has rolled out a number of privatisations of key infrastructure and energy assets, with the aim of releasing cash to pay down debt and fund new infrastructure spending.

The A$2.3 billion ($2.35 billion) refinancing of the Sydney desalination plant is first of several privatisations in New South Wales and the largest one that it has completed to date. The deal was carefully structured to maximise the funds available to the state for other uses and to maximise competitive tension, an outcome that it achieved, as the proceeds of the sale came in above the plant’s retention value and regulated asset base.

The solid counterparty risk, underpinned by a regulated availability-type payment structure and a single offtake contract with a government-owned utility, led to interest both from domestic superannuation funds and overseas pension funds that have been seeking out new jurisdictions for investment opportunities. The deal should persuade investors to look at some of the trickier upcoming privatisations, many of them featuring greater amounts of revenue risk.

The Sydney desalination plant is a drinking water supply plant located in the Kurnell industrial area of Sydney. The plant is designed to provide the city with a more reliable supply of water, following several years of drought at the turn of the century. It is one of the largest desalination plants in the world, with a nameplate capacity of 250 million litres per day, representing 15% of the Sydney region’s water supply.

The government of New South Wales called for registrations of interest for the privatisation of the plant in November 2011. The state structured the deal as a sale-and-leaseback, whereby the assets were transferred to a special purpose company, sold to the government and then leased back to the company for a period of 50 years.

Four consortiums registered interest towards the end of the year and were shortlisted the following February. These were Spark Infrastructure Group, advised by Credit Suisse and Deutsche; Industry Funds Management, advised by Macquarie; Acciona and Trility, advised by UBS; and Hastings Fund Management and Ontario Teachers’ Pension Plan, advised by Morgan Stanley and RBC.

Acciona and Trility withdrew from the process shortly afterwards, and in April the three remaining bidders submitted bids in April, which included fully financed sale and purchase agreements. The government of New South Wales named Ontario Teachers’ Pension Plan and the two Hastings-managed funds, Utilities Fund of Australia and its Infrastructure Fund, preferred bidder a week later.

The sponsors signed the financing at the beginning of May and closed the financing the following month after the deal met its final conditions precedents. The sponsors were under pressure to close the deal in a timely fashion because of the nature of the New South Wales state budget cycle, and were able to do so earlier than the state government had stipulated.

The deal closed through A$1.64 billion in debt from a club of eleven banks – ANZ, BTMU, CBA, Credit Agricole, EDC, HSBC, Morgan Stanley, NAB, RBC, SMBC and Westpac. The deal is split between four facilities, an A$800 million 5-year facility, a A$800 million 3-year bullet facility and a A$40 million 3-year working capital facility, which is designed to provide a hedge against variable power prices.

ANZ, EDC, NAB, RBC and Westpac are taking the largest tickets on the two bullet facilities, about A$180 million each. CBA, HSBC and SMBC are providing A$160 million. BTMU follows with A$105 million, Credit Agricole with A$90 million and Morgan Stanley with A$25 million. The revolving facility is split equally between three lenders – ANZ, NAB and Westpac. The financing is rounded off with A$660 million in equity.

During a period when opportunities for investment in Europe have become more risky and opportunities to buy operational North American infrastructure are still patchy, pension funds such as Canada Pension Plan Investment Board (CPPIB) and Ontario Teachers’ have been looking at investment opportunities in Australia because of the good counterparty risk and stable growth prospects.

The privatisation of the Sydney desalination plant should assure sponsors looking at upcoming opportunities in Australia that debt is available on attractive terms. Three consortiums, which number both Ontario Teachers’ and CPPIB among their members, are currently vying for the privatisation of two ports in New South Wales, port Botany and port Kembla, and are due to submit offers in April.

The deal is expected to be a trickier sale, given the larger project costs and lower leverage expected for the transaction and will be a good test of the appetite of overseas funds for Australian infrastructure assets. Sydney desalination is unlikely to provide a blueprint for the deal, but it at least provides a good indication of interest in a properly structured privatisation. SDP FinCo
STATUS
Closed 1 June
SIZE
A$2.3 billion
DESCRIPTION
Financing for the privatisation of the 250,000 cubic metres per day Sydney desalination plant, located on the outskirts of the city
GRANTOR
Government of
New South Wales
OFFTAKER
Sydney Water Corporation
SPONSORS
Hastings’ Fund Management, Ontario Teachers’ Pension Plan
MANDATED LEAD ARRANGERS
ANZ, BTMU, CBA, Credit Agricole, EDC, HSBC, Morgan Stanley, NAB, RBC, SMBC, WBC
GRANTOR’S FINANCIAL ADVISER
Goldman Sachs
GRANTOR’S LEGAL ADVISER
King & Wood Mallesons
GRANTOR’S TAX ADVISER
KPMG
SPONSORS’ FINANCIAL ADVISERS
Morgan Stanley, RBC
SPONSORS’ LEGAL ADVISERS
Allens, Baker & McKenzie
SPONSORS’ ACCOUNTANTS
Ernst & Young
LENDERS’ LEGAL ADVISER
Gilbert & Tobin
OPERATOR
Veolia